UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington. D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the six months ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______to_______
Commission file number 1-12835
WORLD CALLNET, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2468002
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Brecon House, Meridian Gate, 207 Marsh Wall, London E14 9YT
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code) 0171 335 8300
Securities registered under Section 12 (b) of the Exchange Act: None
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, Par Value $.001
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(Title of Class)
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
As of May 10, 2000 there were 18,169,304 shares of registrant's common
stock outstanding.
Transitional Small Business Disclosure Format (Check One): Yes No X
--- ---
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REGISTRANT'S DISCLAIMER STATEMENT RE: PRIVATE SECURITIES LITIGATION REFORM ACT
AND OTHER MATTERS
The statements in this Report on Form 10-QSB and in other filings by
World CallNet, Inc. (the "Company") with the Securities and Exchange Commission,
or in press releases issued by the Company that are not based on historical
information are considered forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding the
Company's projections, hopes, expectations, intentions, beliefs or strategies
regarding the future. Forward-looking statements include, but are not limited
to, plans discussed in the Company's Form 10-K for the period ended September
30, 1999, in the section entitled "Description of Business" regarding: (i) its
plans to market its proprietary MailTV products in Europe, North America, South
America and Asia Pacific, (ii) its belief that offering free Internet access
will capture customers for CallNet Plc, (iii) its statement that other companies
engaged in Internet related businesses may be acquired, (iv) its belief that the
majority of its future revenues will be derived from MailTV and its ownership of
CallNet Plc, which earns a share of telephone toll revenues from companies that
provide telephone service to their customers, and (v) the belief that its
products and services will appeal to the many segments of the Internet market;
its statement in Legal Proceedings that the outcome of any legal proceedings and
claims against the Company will not have a material adverse effect on the
Company's business, operating results, and financial condition; and statements
in Liquidity and Capital Resources regarding (i) the projection that its working
capital will be adequate until the end of 2000, (ii) the projection that
additional capital from the sale of debt or equity securities will be necessary
after the end of year 2000, (iii) the expectation that product development and
manufacturing costs will be borne by the Company and business partners, (iv) the
estimate of property and/or significant capital equipment expenditures for the
next twelve months, (v) the expectation that Internet related revenues derived
from its proprietary MailTV products and ownership of CallNet Plc will be the
primary source of internal liquidity and sales of products that are designed to
facilitate new Internet access will be a secondary source of internal liquidity,
and (vi) the anticipation that the year 2000 will not have a material impact on
the Company.
It is possible that the Company's projections, hopes, expectations,
intentions, beliefs, plans or strategies regarding the future and hopes outlined
above may not be achieved due to factors and circumstances discussed elsewhere
in this Form 10-QSB. See Part 1, Item 2, "Management's Discussion and Analysis
or Plan of Operation."
World CallNet, Inc. is not affiliated with, sponsored by or endorsed by
any of the following companies who have similar trade names, trademarks or
service marks: Worldcall Communications International, Inc.; Computer Calling
Technologies, Inc.; AT&T Corp.; Worldnet Communications, Inc.; Luckman
Interactive, Inc.; Allnet Communications Services, Inc.; West Coast
Telecommunications, Inc.; and Worldnet Communications, Inc.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Financial information required by Item 301(b) of Regulation S-B can be
found on the pages following Item 2 below. The financial information contained
herein for the six months ended March 31, 2000 is unaudited but includes all
adjustments that the Company considers necessary for a fair presentation of the
results for such periods. The financial information should be read in
conjunction with the financial statements for the year ended September 30, 1999
included in the Company's Annual Report on Form 10-KSB. Operating results for
the six months ended March 31, 2000 are not necessarily indicative of the
results that may be expected for the entire year ended September 30, 2000.
Item 2. Management's Discussion and Analysis or Plan of Operation.
During 1998 the Company sold all of its interests in oil and gas
royalty properties for cash and, after repayment of debt and accounts payable,
became a publicly traded shell. In October 1998, the Company completed the
acquisition of World Wide Communication (Holdings) Ltd. ("WWCH"), in a
transaction accounted for as a reverse acquisition. As a result, the Company
became the successor to the business and financial operations of WWCH, including
its fiscal yearend of September 30. WWCH began operations in January 1998 and
this report includes historical data since that date. In January 1999, the
Company changed its name to World CallNet, Inc.
LIQUIDITY AND CAPITAL RESOURCES
Since incorporation in January 1998, the Company has been involved
primarily in capital formation activities, refinement of its business strategy
and development of relationships with industry partners. The Company's principal
external source of capital for developing its products and services has been
proceeds from bridge debt financing and the private placement of common stock.
Additional placements of bridge notes or the sale of equity securities to fund
operating expenses will be necessary until the Company becomes profitable.
In September 1999, the Company entered into an agreement with Australian-based
MailTV Pty to sell up to 14,500,000 shares of its common stock for cash and
equity ownership in MailTV Pty. Sales of the Company's common stock to MailTV
Pty were completed on January 31, 2000. The Company received a total of
$3,884,920 and 653,125 shares of KeyClub.net, the parent company of MailTV Pty,
in consideration for 4,143,915 shares of the Company's common stock. Due to
operational disputes with MailTV Pty it is uncertain whether any additional
sales of common stock will be completed pursuant to the agreement.
In January 2000, the Company completed a private placement of common stock
totaling $2,362,500 at $1.75 per share. The Company also completed in April
2000, a private placement of common stock totaling $3,981,112 at $4 per share.
Approximately $573,000 of the proceeds from the aforementioned sales of
common stock was used to repay bridge notes payable and accrued interest. On
March 31, 2000, the remaining outstanding bridge notes payable of $1,137,500
plus accrued interest of $57,500 were repaid in exchange for 891,787 shares of
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the Company's common stock. The transaction included the exercise of 487,500
stock purchase warrants at $1 per share, with the remaining $707,500 of
principal and accrued interest exchanged for common stock at $1.75 per share.
The Company's plan of operation for the next twelve months includes the
ongoing operation of its Internet service and the continued development and
marketing of its proprietary Internet products such as MailTV. The Company will
require substantial capital to implement its business plan. It is expected that
costs of product development and manufacturing of its products will be borne by
the Company and business partners such as Zilog, OEM television manufacturers
and other third parties seeking to generate new technologies and MailTV
applications developed by the Company.
The Company has incurred significant net losses since inception, which
raises substantial doubt about the Company's ability to continue as a going
concern. However, with present working capital of approximately $2,900,000, the
Company estimates it can satisfy its obligations and cash requirements until the
end of 2000. To meet its working capital obligations plus research and
development cost requirements after the end of 2000, the Company will have to
raise additional capital from external sources if cash generated from operations
is not sufficient.
If the additional financing is not successfully completed and if the
Company is not able to obtain additional financing arrangements, it may be
unable to meet its continuing operational obligations, pursue its basic business
strategy, take advantage of new opportunities, develop or enhance existing
products, or respond to competitive pressures and financial or marketing
hurdles. Such inability could have a materially adverse effect on the business,
operating results and financial condition. Moreover, the estimated cost of the
proposed expansion of the Company's production and marketing activities is
subject to numerous uncertainties, including the problems, expenses,
difficulties, complications and delays, many of which are beyond management's
control, frequently encountered in connection with the establishment and
development of new business activities, and may be affected by the competitive
environment in which the Company is operating. Accordingly, there can be no
assurance that the Company will complete the proposed expansion of production
and marketing activities described herein.
The Company has estimated that expenditures for plant and/or
significant capital equipment will be approximately $1,500,000 during the next
twelve months.
If necessary, the Company will issue shares of its capital stock to
acquire assets, customers and other entities that appear to be viable business
opportunities.
The Company expects that its primary sources of internal liquidity will
be fees, toll charges and rebates earned under the terms of agreements with
telecommunications companies doing business with CallNet Plc Internet and MailTV
customers. In addition the Company will earn revenues from e-commerce activities
from both CallNet ISP and MailTV. The fundamental business strategy is to direct
telephone usage to the CallNet telecommunications network by increasing the
CallNet Plc customer base and through sales and usage of MailTV. The Company
also has agreements to earn a percentage of sales from companies that market
products and services through web sites hosted by CallNet Plc. The Company also
offers products that are designed to facilitate new Internet access. Sales of
such products and services are expected to be a secondary source of revenues for
the Company.
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The Company has implemented certain changes, as necessary, to its
information systems and accordingly does not anticipate any material year 2000
issues from its own systems, programs or from any of its products. The impact of
such issues on the Company's suppliers, customers, vendors and financial service
organizations is not expected to have an adverse effect on the Company.
RESULTS OF OPERATIONS
Revenues increased from $118,477 for the six months ended March 31,
1999, to $933,540 for the six months ended March 31, 2000, due to increases in
licensing fees and telephone toll charges earned under the terms of CallNet
Plc's agreements with telecommunications companies.
However, the production and development costs attributable to revenues
for the six months ended March 31, 2000 totaled $1,875,855. CallNet Plc's
agreement with North American Gateway ("NAG") required NAG to pay interconnect
charges for telephone usage by CallNet internet customers and earn CallNet Plc
rebates and discounts for long distance calls made through NAG's network. NAG
breached its contract with CallNet Plc by not paying interconnect charges for
CallNet Plc's customers telephone usage and failed to remit any rebates or fees
earned for long distance calls placed by its customers through NAG's network.
This adversely affected revenues and related costs for the six months ended
March 31, 2000. In February 2000, dialers were provided to all Internet
subscribers, which enables CallNet Plc to bill its customers for long distance
telephone charges, while providing completely free Internet access.
General and administrative expenses increased from $918,459 for the six
months ended March 31, 1999, to $3,040,719 for the six months ended March 31,
2000. The increase was due to the cost of additional personnel, infrastructure
and facilities necessary to meet the growth in the Company's operations. Since
the launching of CallNet 0800 free Internet access in October 1999, the Company
has added additional fulltime employees in response to the significant growth in
new subscribers.
Interest expense (before amortization of discount) for the six months
ended March 31, 2000 decreased when compared to the six months ended March 31,
1999 due to the repayment of bridge notes commencing in October 1999.
Amortization of the remaining discount related to such debt was $195,049 for the
six months ended March 31, 2000 and was $43,637 for the six months ended March
31, 1999. The discount related to the value, as calculated using the Black
Scholes options pricing model, of stock purchase warrants issued in connection
with the bridge notes.
Depreciation and amortization for the six months ended March 31, 2000,
is primarily composed of approximately $500,000 of amortization of the excess
cost over book value of the assets of CallNet Plc, which became a 100% owned
subsidiary of the Company in September 1999.
CAUTIONARY FACTORS
The success of the Company's plan of operation may be adversely
affected by several principal factors.
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NEED FOR ADDITIONAL CAPITAL
The Company needs a substantial amount of capital to achieve the
objectives in its business plan. Conditions in financial markets influence
investors' attitudes and willingness to invest in a particular industry issuer
or type of security. If the Company is unable to obtain additional capital
through private or public placement of its debt or equity securities, asset
based or bank financing, or through ventures with industry partners, its ability
to achieve its business objectives could be substantially impaired.
COMPETITION
The online services and Internet markets are highly competitive. The
Company believes that existing competitors, which include, among others,
commercial online services such as America OnLine and Dixon's FreeServe,
Internet-based services, including, among others, the Microsoft Network, and
Internet service providers, including various national and local independent
Internet service providers as well as long distance and regional telephone
companies, including, among others, British Telecommunications and Cable &
Wireless Communications and various other regional telephone operating
companies, are likely to enhance their service offerings. In addition, new
competitors, including Internet directory services and various media and
telecommunications companies, have entered or announced plans to enter the
online services and Internet markets, resulting in greater competition for the
Company. Many of the direct competitors and possible future competitors referred
to above have significantly greater financial, technical, marketing and
personnel resources than the Company. These factors may have a material adverse
effect on the Company's financial condition and operating results. In addition,
in response to increased competition, the Company may adopt additional
strategies designed to continue the growth in its subscriber base, such as new
marketing programs and promotional offers and implementation of new pricing
programs. Such strategies may result in an increase in costs as a percentage of
revenue.
The business of providing Internet access services is new, extremely
competitive, rapidly evolving and subject to rapid technological change. World
CallNet expects that such competition will intensify significantly in the near
future. A number of companies are developing or have introduced devices and
technologies to facilitate access to the Internet via a television. Set top
boxes and devices are proposed or under development, as well as video game
devices that provide Internet access. In addition, manufacturers of television
sets have announced plans to introduce Internet access and Web browsing
capabilities into their products through set-top boxes.
Personal computer manufacturers are introducing Personal Communications
Systems that offer full-fledged television viewing combined with Internet
access. Operators of cable television systems also plan to offer Internet access
in conjunction with cable service. World CallNet also competes with Internet
service providers and commercial online services. There can be no assurance that
World CallNet's competitors will not develop Internet access products and
services that are superior to, and priced competitively with those of World
CallNet, thereby achieving greater market acceptance than MailTV. Many of World
CallNet's competitors, as well as potential competitors, have longer operating
histories, greater name recognition, larger installed customer bases and
significantly greater financial, technical and marketing resources than World
CallNet.
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SUBSCRIBER ATTRITION RATES
World CallNet will devote considerable financial and human resources to
attract subscribers to its service; however, due to circumstances that may or
may not be beyond the control of the Company, these subscribers may discontinue
their affiliation with the Company. As a result of subscriber attrition, the
revenues generated from Internet usage may decline considerably, as may the
rates that the Company can charge from advertising on its service as well as the
revenues that the Company anticipates from e-commerce.
NETWORK CAPACITY AND OPERATIONS
Rapid growth in subscriber demand may cause the Company and its data
communications access providers to experience difficulty at certain times in
providing adequate server and network capacity. As a result, subscribers may
from time to time encounter difficulty in accessing and using the CallNet
service. There can be no assurance that the Company will be able to expand
server and network capacity at a rate sufficient to satisfy increasing
subscriber demands, and the failure to do so could have a material adverse
effect on the Company's business. The Company currently relies on several
companies to provide data communications access to its service. Any damage or
failure that causes interruptions in operations could have a material adverse
effect on the Company's business.
The Company's operations are dependent on its ability to protect its
computer equipment and the information stored in its data centers against damage
by fire, power loss, telecommunications failures, unauthorized intrusions and
other events. The Company believes it has taken prudent measures to reduce the
risk of interruption in its operations. However, there can be no assurance that
these measures are sufficient. Any damage or failure that causes interruptions
in the Company's operations could have a material adverse effect on its
business. While the Company carries property and business interruption insurance
to cover its computer operations, the coverage may not be adequate to compensate
for losses that may occur.
PRESSURES ON OPERATING MARGINS
One of the Company's goals is to increase market share by rapidly
growing its subscriber base. To achieve this goal, the Company has aggressively
promoted its service offerings and may implement other strategies designed to
facilitate subscriber growth. The costs associated with the rapid growth in its
subscriber base and investments in customer support have placed, and will
continue to place, pressures on the Company's operating margins.
The Company may adopt additional strategies designed to continue the
growth in its subscriber base, such as new marketing programs and promotional
offers. Such strategies may result in an increase in costs as a percentage of
revenues. In addition, acceleration in the growth of its subscriber base,
changes in usage patterns among members or continuing investments in content may
also increase costs as a percentage of revenues. As a result, the Company does
not believe its operating margins have stabilized. There can be no assurance
that the Company's operating margins will not be adversely affected in the
future by such strategies or other conditions.
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SEASONALITY
Subscriber acquisition is expected to be highest in the second and
third calendar quarters, when sales of new computers and computer software are
highest due to the holiday season. Customer usage is expected to be lower in the
summer months due largely to extended day light hours and competing outdoor
leisure activities.
MANAGING A RAPIDLY GROWING AND CHANGING BUSINESS
The Company continues to experience major changes in its operations
resulting from rapid expansion of its business and other factors, which have
placed significant demands on its administrative, operational and financial
resources. The Company's future performance will depend in part on its ability
to manage its growth and to adapt its administrative, operational and financial
control systems to the needs of the expanded entity. The failure of management
to anticipate, respond to and manage changing business conditions could have a
material adverse effect on the Company's business and results of operations.
ACCESS TO CONTENT PROVIDERS
As competition in the online services market intensifies, it may become
more difficult or expensive to secure and retain content and/ or content
providers. The Company generally pays royalties to its content providers under
short term renewable agreements, and there can be no assurance that the loss of
a number of content providers or significantly increased costs to maintain
certain content providers would not have a material adverse effect on the
Company's business.
NEW BUSINESSES AND INTERNATIONAL VENTURES
The Company pursues new products and services to diversify its sources
of revenue and leverage its technological and other competencies. There can be
no assurance that the Company will be able to successfully develop, or achieve
commercial acceptance for, these new products and services. The Company intends
to offer online services internationally through either wholly owned operations
or through joint ventures with existing Internet service providers of
telecommunications companies. There can be no assurance that the Company or its
partners will be able to successfully market, sell and deliver its services in
these markets. In addition, there are certain significant risks inherent in
doing business on an international level, such as laws governing content that
differ greatly from country to country, unexpected changes in regulatory
requirements, political risks, export restrictions, export controls relating to
encryption technology, tariffs and other trade barriers, fluctuations in
currency exchange rates, issues regarding intellectual property and potentially
adverse tax consequences, any or all of which could impact the Company's
international operations.
CHANGING TECHNOLOGIES
As online services evolve, the Company will be required to offer
technological advances such as improved data compression and delivery of voice
and full motion video. Currently, online services are accessed primarily by
personal computers via modem. As online services become accessible by screen
based telephones, television or other consumer electronic devices, and become
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commercially deliverable over other wired conduits such as coaxial and fiber
optic cable, the Company may have to develop new technology or modify its
existing technology to keep pace with these developments. Pursuit of these
technological advances will require substantial expenditures, and there can be
no assurance that the Company will succeed in adapting its online service
business to alternate access devices and conduits.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
Changes in the regulatory environment relating to the
telecommunications and media industry could have an adverse effect on the
Company's business. The Company cannot predict the likelihood that any such
legislation will pass, or the financial impact, if any, the resulting regulation
may have. Moreover, the applicability to online service and Internet access
providers of existing laws governing issues such as intellectual property
ownership, libel and personal privacy is uncertain. The law relating to the
liability of online service companies and Internet access providers for
information carried on or disseminated through their systems is currently
unsettled and has been the subject of several recent private lawsuits. If
similar actions were to be initiated against the Company, costs incurred as a
result of such actions could have a material adverse effect on the Company's
business.
RELIANCE ON KEY PERSONNEL
The Company's success depends in part upon the performance of its
executive officers and other key employees. The loss of the services of one or
more of its key personnel could have a material adverse effect on the Company.
The Company depends on its continued ability to attract and retain highly
skilled and qualified personnel. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting and
retaining such personnel.
RELIANCE ON THIRD PARTIES
The Company depends substantially upon third parties for several
critical elements of its business, including revenue sharing and Internet
routing agreements with telecommunications companies and the Company's agreement
with Zilog, Inc. pursuant to which Zilog, Inc. has agreed to manufacture and
supply MailTV chips to television manufacturers. The Company will outsource the
manufacture of its MAILTV retrofit keyboards from an outside manufacturer
pursuant to purchase orders placed from time to time, will not carry significant
inventories of these keyboards and will have no guaranteed supply arrangements.
The Company relies on local telephone companies and other companies to provide
data communications capacity via local telecommunications lines and leased long
distance lines.
INTELLECTUAL PROPERTY ISSUES
The Company regards its patents, trademarks, trade dress, trade secrets
and similar intellectual property as critical to its success, and the Company
will rely upon patent law, trademark law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. There can be no assurance
that the steps taken by the Company to protect any of its proprietary rights
will be adequate or that third parties will not infringe or misappropriate the
Company's patents, trademarks, trade dress and similar proprietary rights. In
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addition, there can be no assurance that other parties will not assert
infringement claims against the Company.
VOLATILITY OF SHARE PRICE
The market price of the Company's Common Stock has a history of
volatility. Factors such as quarterly variations in financial results and
membership growth and usage, new pricing strategies, the announcement of
technological innovations, mergers, acquisitions, strategic partnerships or new
product offerings by the Company or its competitors, the entrance of new
competitors into the online services market and changes in content providers may
have a significant impact on the market price of the Common Stock. Moreover, the
Common Stock could experience price volatility based on market conditions.
SALES OF COMMON STOCK
Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices of the Common Stock. The warrants that
have been issued by the Company since the reverse acquisition of WWCH have
provided for demand and piggyback registration rights. Exercise of such
registration rights could increase the number of shares of Common Stock sold in
the public markets.
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<TABLE>
<CAPTION>
WORLD CALLNET, INC.
CONSOLIDATED BALANCE SHEET
(Expressed in U.S. Dollars)
AS OF MARCH 31, 2000
(Unaudited)
ASSETS
- ------
<S> <C>
CURRENT ASSETS:
Cash $ 5,009,655
Trade accounts receivable, no allowance for doubtful accounts 657,446
------------
5,667,101
Total current assets
Investment in marketable equity securities 326,563
Furniture and fixtures, at cost 287,843
Goodwill, net of accumulated amortization of $575,050 4,248,015
Other intangible assets, net 179,186
Bonds, deposits and other assets 422,950
------------
Total other assets 5,464,957
Total assets $ 11,131,658
============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Notes payable $ 12,500
Accounts payable and accrued expenses 2,689,825
------------
Total current liabilities 2,702,325
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 10,000,000 shares
Common stock, $0.001 par value; 100,000,000 shares authorized:
17,117,595 shares issued and 16,617,595 shares outstanding 17,117
Common stock subscribed 3,405,088
Additional paid-in capital 15,687,396
Accumulated deficit (9,770,989)
Treasury stock, 500,000 shares, at cost (507,936)
Valuation allowance for investment securities (401,343)
------------
Total stockholders' equity 8,429,333
Total liabilities and stockholders' equity $ 11,131,658
============
</TABLE>
See accompanying notes to these financial statements.
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<TABLE>
<CAPTION>
WORLD CALLNET, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Expressed in U.S. Dollars)
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $ 554,330 $ 83,204 $ 933,450 $ 118,477
COSTS AND EXPENSES:
3,806,914 526,494 5,733,869 986,665
------------ ------------ ------------ ------------
NET LOSS $ (3,252,584) $ (443,290) $ (4,800,329) $ (868,188)
============ ============ ============ ============
NET LOSS PER SHARE (basic and diluted) $ (.23) $ (.06) $ (.35) $ (.12)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES 14,216,165 7,325,377 13,590,629 7,245,043
============ ============ ============ ============
</TABLE>
See accompanying notes to these financial statements.
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Expressed in U.S. Dollars)
FOR THE SIX MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,800,329) $ (868,188)
Depreciation and amortization expense 564,704 1,900
Amortization of debt issuance costs 195,049 43,637
Issuance of common stock for services 90,000
Increase in receivables (509,889) (512,593)
Decrease in prepaid expenses 99,159 --
Increase in bonds, deposits and other assets (204,131) --
Increase in accounts payable and accrued expenses 1,196,238 201,829
Other (15,115) 25,986
Net cash used by operating activities (3,384,314) (1,107,427)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase furniture and fixtures (145,951) (66,053)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term indebtedness, net of financing costs -- 1,092,500
Repayment of short-term indebtedness (550,000) --
Cash received in common stock issuances and subscriptions 8,875,677 167,560
----------- -----------
8,325,677 512,884
NET INCREASE IN CASH 4,795,412 86,580
CASH, beginning of period 214,243 1,995
----------- -----------
CASH, end of period $ 5,009,655 $ 88,575
=========== ===========
NON CASH TRANSACTIONS:
Purchase of net assets in reverse acquisition for common stock -- 14,872
Acquisition of CallNet Plc shares for common stock -- 500,000
Repayment of notes payable with common stock 1,137,500
-----------
$ 1,137,500 $ 514,872
=========== ===========
</TABLE>
See accompanying notes to these financial statements.
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WORLD CALLNET, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Expressed in U.S. Dollars
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------------
Organization and Nature of Operations
-------------------------------------
World CallNet, Inc. (the "Company") is incorporated in the United Kingdom.
The Company is primarily engaged in developing proprietary Internet devices
and software applications, developing commercial Internet websites and
operating a pay-as-you-go Internet service provider. Primarily all of the
Company's operations and customers are located in the United Kingdom as of
March 31, 2000.
Unaudited Information
---------------------
The consolidated balance as of March 31, 2000 and the consolidated
statements of operations for the three and six month periods ended March
31, 2000 and 1999 were taken from the Company's books and records without
audit. However, in the opinion of management, such information includes all
adjustments (consisting only of normal recurring accruals) which are
necessary to properly reflect the consolidated financial position of the
Company as of March 31, 2000 and the results of operations for the three
and six months ended March 31, 2000 and 1999.
The accompanying financial statements include the accounts of the Company
and its two wholly owned subsidiaries, CallNet Plc and Overleaf Systems,
Limited ("Overleaf"). Overleaf has been inactive to date. All significant
balances and transactions have been eliminated in consolidation. The
foregoing notes to these financial statements include only the information
regarding transactions and events that occurred during the six months ended
March 31, 2000. These notes should be read in conjunction with the notes to
the audited September 30, 1999 financial statements.
2. TRANSACTION WITH MAILTV
-----------------------
In September 1999, the Company entered into an agreement with MailTV Pty
Ltd. ("MailTV"), an Australian company, in which MailTV is to acquire
14,500,000 shares of the Company's common stock in two phases. The first
phase involved the Company exchanging 2,900,000 shares of its common stock
for $2,718,750 in cash and 453,125 shares of KeyClub.net, a publicly traded
company affiliated with MailTV. This phase closed on September 30, 1999,
although $1,765,530 of the cash was received in installments that were
completed in January 2000.
14
<PAGE>
WORLD CALLNET, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Expressed in U.S. Dollars
The second phase ended on January 31, 2000, with the Company exchanging
1,243,915 shares of its common stock for $1,166,170 in cash and 200,000
shares of KeyClub.net. As a result of KeyClub.net losing its trading
privileges on the OTC Bulletin Board, the Company has provided a valuation
allowance of $401,343 on its investment in KeyClub.net shares. The
valuation allowance reflects an adjustment to the carrying value of the
KeyClub.net shares to equal $.50 per share. Management does not currently
believe the reduction in value is permanent in nature and has recorded it
as a component of stockholders' equity.
Due to operational disputes and mutual defaults under the terms of the
agreement with MailTV Pty, the Company is uncertain whether any additional
exchanges will be consummated with MailTV Pty.
3. NOTES PAYABLE
-------------
In October and December 1999, the Company repaid in cash $550,000 of notes
payable, plus accrued interest to three note holders. On March 31, 2000,
$1,137,500 of the remaining $1,150,000 notes payable, plus accrued interest
of $57,500 was repaid through the issuance of the Company's common stock to
the note holders. Stock purchase warrants covering 487,500 shares of the
Company's common stock were exercised at $1.00 per share and remaining
principal and accrued interest was repaid through the issuance of common
stock at $1.75 per share. A total of 891,787 shares of the Company's common
stock were issued in the exchange and warrant exercises by the note
holders. At March 31, 2000, $12,500 of notes payable remained outstanding
and were repaid in cash during April 2000. As of March 31, 2000, 1,187,500
stock purchase warrants remained outstanding.
4. STOCKHOLDERS' EQUITY
--------------------
In January 2000, the Company completed a private placement of 1,350,000
shares of its common stock for total proceeds of $ 2,362,500. In connection
with the placement, the Company paid a cash commission of $37,100 and
issued 150,000 shares of its common stock.
On February 24, 2000, the Company's stockholders approved the following
proposals:
o An amendment to the Company's Stock Option Plan to increase
the number of shares to be issued under such plan from
1,000,000 to 3,000,000.
o An amendment to the Company's Second Amended and Restated
Certificate of Incorporation to increase the authorized number
of shares of common stock from 30,000,000 to 100,000,000.
15
<PAGE>
5. SUBSEQUENT EVENT
----------------
On April 19, 2000, the Company completed the private placement of
$3,981,112 of its common stock at $4.00 per share. In connection with the
offering, the Company paid a cash commission of $112,500 and issued 28,125
shares of its common stock. At March 31, 2000, the Company had received
$3,405,088 in cash stock subscriptions and has included such amount as
common stock subscribed in the accompanying balance sheet at March 31,
2000.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
Not Applicable
Item 3. Defaults on Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
On February 24, 2000, the Company held its annual meeting of stockholders. The
Company's stockholders were submitted and approved the following proposals:
1) To elect three directors to the Company's Board of Directors, each
to hold office until his successor is elected and qualified or
until his earlier resignation or removal.
2) To approve an amendment to the Company's Stock Option Plan to
increase the number of shares to be issued under such plan from
1,000,000 to 3,000,000.
3) To approve an amendment to the Company's Second Amended and
Restated Certificate of Incorporation to increase its authorized
number of shares of common stock from 30,000,000 shares to
100,000,000 shares.
4) To ratify the appointment of Hein + Associates, L.L.P. as the
Company's independent auditors for the fiscal year ending
September 30, 2000.
The results of the vote of the stockholders with respect to these matters were
as follows:
Abstain/ Broker
For Against Withheld No-Votes
Election of Directors:
Paul Goodman-Simpson 11,590,159 1,000 5,433 -
Aaron Goodman-Simpson 11,590,159 1,000 5,433 -
Keith Goodyer 11,590,159 1,000 5,433 -
17
<PAGE>
Abstain/ Broker
For Against Withheld No-Votes
To amend the Company's
Stock Option Plan for an
increase of number of
shares from 1,000,000
to 3,000,000 10,158,000 17,820 52,746 1,438,592
To amend the Company's
Second Amended and
Restated Certificate of
Incorporation to increase
the authorized number of
common stock from
30,000,000 to 100,000,000 11,596,592 21,233 45,646 -
To ratify the appointment
Of Hein + Associates, LLP
as independent auditors for
the fiscal year ending on
September 30, 2000 11,596,592 5,300 2,265 -
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Certificate of Amendment to the Certificate of Incorporation of the
Company, which is incorporated by reference herein from Exhibit 3.1 to
the Company's Form 8-K, dated January 5, 1999.
3.2 Amendment to Second Amended and Restated Certificate of Incorporation,
dated February __, 2000.
3.2 By-laws of the Company, which are incorporated by reference herein as
Exhibit 3(ii) to Form 10 filed on March 26, 1997.
10.1 Amended 1998 Stock Option Plan.
27.1 Financial Data Schedule.
18
<PAGE>
(b) Reports on Form 8-K.
A Current Report on Form 8-K was filed with the Commission by the
Company on February 15, 2000, to report the amendment of the agreement
with MailTV Pty to provide an extension of time for MailTV Pty to
complete its funding obligations until February 29, 2000. The Company
also reported that outstanding promissory notes in the principal amount
of $1,150,000 were past due.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WORLD CALLNET, INC.
-------------------
(Registrant)
/s/ Paul Goodman-Simpson
--------------------------------
Paul Goodman-Simpson, Director,
President and Chief Executive
Officer
Date: May 22, 2000
/s/Aaron Goodman-Simpson
--------------------------------
Aaron Goodman-Simpson, Vice
President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
Date: May 22, 2000
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
WORLD CALLNET, INC.
The undersigned, being the President and Secretary of WORLD CALLNET,
INC., (the "Corporation"), a corporation existing under the laws of the State of
Delaware, does hereby certify under the seal of the said corporation as follows:
1. The name of the Corporation (hereinafter referred to as the
"Corporation") is World CallNet, Inc. The date of filing the original
certificate of incorporation with the Secretary of State of Delaware was
December 28, 1992.
2. Article FOUR of the Certificate of Incorporation of the Corporation
is hereby amended to be and read as follows:
"FOUR: Capital Stock. (A) The total number of shares which the
corporation shall have authority to issue is 110,000,000, all of which
have a par value of $0.001; 100,000,000 of said shares are Common Stock
and 10,000,000 of said shares are Preferred Stock.
(B) The powers, preferences and rights, and the
qualifications, limitations and restrictions of the Corporation's
Common Stock and Preferred Stock are as follows:
(i) holders of the Corporation's Common Stock as a class, have
equal ratable rights to receive dividends when, as and if
declared by the Board of Directors, out of funds legally
available therefor and are entitled upon liquidation of the
Company to share ratably in the net assets available for
distribution, are not redeemable and have no pre-emptive or
similar rights; and holders of the Corporation's Common Stock
have one non-cumulative vote for each share held of record on
all matters to be voted on by the Corporation's stockholders.
(ii) the shares of Preferred Stock may be issued in series,
and shall have such voting powers, full or limited, or no
voting powers, and such designations, preferences and relative
participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, as shall
be stated and expressed in the resolution or resolutions
providing for the issuance of such stock adopted from time to
time by the Board of Directors. The Board of Directors is
hereby expressly vested with the authority to determine and
fix in the resolution or resolutions providing for the
<PAGE>
issuances of Preferred Stock the voting powers, designations,
preferences and rights, and the qualifications, limitations or
restrictions thereof, of each such series to the full extent
now or hereafter permitted by the laws of the State of
Delaware.
3. The amendment of the certificate of incorporation herein certified
has been duly adopted by the unanimous written consent of the Corporation's
Board of Directors and a majority of the Corporation's shareholders in
accordance with the provisions of Sections 141(f), 228 and 242 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
hereunto affixed and this Certificate of Amendment of the Corporation's
Certificate of Incorporation to be signed by Paul Goodman Simpson, its President
and Jeremy Pell, its Secretary, this 22nd day of May, 2000.
WORLD CALLNET, INC.
By: /s/Paul Goodman-Simpson
-------------------------
Paul Goodman Simpson,
President
By: /s/ Jeremy Pell
--------------------
Jeremy Pell,
Secretary
WORLD CALLNET, INC.
AMENDED 1998 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this 1998 Stock Option Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under this Plan may be incentive stock options (as
defined under Section 422 of the Code) or nonqualified stock options, as
determined by the Option Committee at the time of grant of an option and subject
to the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder.
2. Definitions. As used herein, the following definitions shall apply:
2.1 "Option Committee" means the Board or any of its committees, as
applicable, that is administering the Plan pursuant to Section 4 of the
Plan.
2.2 "Board" means the Board of Directors of the Company.
2.3 "Code" means the Internal Revenue Code of 1986, as amended.
2.4 "Company" means WORLD CALLNET, INC., a Delaware corporation.
2.5 "Consultant" means any consultant or advisor to the Company or any
Parent or Subsidiary and any director of the Company whether
compensated for such services or not, but not including any Employee.
2.6 "Continuous Status as an Employee" means the absence of any
interruption or termination of the employment relationship by the
Company or any Subsidiary. Continuous Status as an Employee shall not
be considered interrupted in the case of: (i) any leave of absence
approved by the Board, including sick leave, military leave, or any
other personal leave; provided, however, that for purposes of Incentive
Stock Options, such leave is for a period of not more than 90 days,
unless reemployment upon the expiration of such leave is guaranteed by
contract or statute, or unless provided otherwise pursuant to Company
policy adopted from time to time; or (ii) in the case of transfers
between locations of the Company or between the Company, its
Subsidiaries or its successors.
2.7 "Employee" means any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The
payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
2.8 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
2.9 "Fair Market Value" means, as of any date, the value of Stock
determined as follows:
2.9.1 If the Stock is listed on any established stock exchange
or a national market system including without limitation the
National Market System of the National Association of
Securities Dealers, Inc. Automated Quotation ("Nasdaq")
System, its Fair Market Value shall be the closing sales price
for such stock (or the closing bid, if no sales were reported,
<PAGE>
as quoted on such system or exchange or the exchange with the
greatest volume of trading in Stock for the last market
trading day prior to the time of determination) as reported in
the Wall Street Journal or such other source as the Option
Committee deems reliable;
2.9.2 If the Stock is quoted on Nasdaq SmallCap (but not on
the National Market System) or regularly quoted by a
recognized securities dealer but selling prices are not
reported, its Fair Market Value shall be the mean between the
high and low asked prices for the Stock; or
2.9.3 In the absence of an established market for the Stock,
the Fair Market Value thereof shall be determined in good
faith by the Option Committee.
2.10 "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
2.11 "Nonqualified Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
2.12 "Option" means a stock option granted pursuant to the Plan.
2.13 "Optioned Stock" means the Stock subject to an Option.
2.14 "Optionee" means an Employee or Consultant who receives an
Option.
2.15 "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
2.16 "Plan" means this 1998 Stock Option Plan, as amended.
2.17 "Share" means a share of the Stock, as adjusted in accordance with
Section 13 of the Plan.
2.18 "Stock" means the Common Stock, par value $.001 per share, of the
Company.
2.19 "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of the
Plan, the maximum number of shares of Stock which may be optioned and sold under
the Plan is 3,000,000 shares. The shares may be authorized, but unissued, or
reacquired Stock. If an Option should expire or become unexercisable for any
reason without having been exercised in full, the unpurchased Shares, which were
subject thereto, shall, unless the Plan shall have been terminated, become
available for future grant under the Plan.
4. Administration of the Plan.
4.1 Administration By Board or Committee. The Plan shall be
administered by (a) the Board or (b) a committee designated by the
Board to administer the Plan, which committee shall be constituted in
such a manner as to permit the Plan to comply with Rule 16b-3
<PAGE>
promulgated under the Exchange Act or any successor thereto ("Rule
16b-3") with respect to a plan intended to qualify thereunder as a
discretionary plan. Once appointed, such committee shall continue to
serve in its designated capacity until otherwise directed by the Board.
From time to time the Board may increase the size of the committee and
appoint additional members thereof, remove members (with or without
cause) and appoint new members in substitution therefore, fill
vacancies, however caused, and remove all members of the committee and
thereafter directly administer the Plan, all to the extent permitted by
Rule 16b-3 with respect to a plan intended to qualify thereunder as a
discretionary plan.
4.2 Limitation on Administration by Board. Notwithstanding the
foregoing, the Plan shall not be administered by the Board if (a) the
Company and its officers and directors are then subject to the
requirements of Section 16 of the Exchange Act and (b) the Board's
administration of the Plan would prevent the Plan from complying with
Rule 16b-3.
4.3 Multiple Administrative Bodies. If permitted by Rule 16b-3, the
Plan may be administered by different bodies with respect to directors,
non-director officers and Employees who are neither directors nor
officers.
4.4 Powers of the Option Committee. Subject to the provisions of the
Plan and in, the case of a committee, the specific duties delegated by
the Board to such committee, the Option Committee shall have the
authority, in its discretion:
4.4.1 to determine whether and to what extent Options shall be
granted hereunder;
4.4.2 to select the officers, Consultants and Employees to
whom Options may from time to time be granted hereunder;
4.4.3 to determine the number of shares of Stock to be covered
by each such award granted hereunder;
4.4.4 to determine the Fair Market Value of the Stock, in
accordance with Section 2.9 of the Plan;
4.4.5 to approve forms of agreement for use under the Plan;
4.4.6 to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder
(including, but not limited to, the per share exercise price
for the Shares to be issued pursuant to the exercise of an
Option and any restriction or limitation, or any vesting,
acceleration or waiver of forfeiture restrictions regarding
any Option or other award and/or the shares of Stock relating
thereto, based in each case on such factors as the Option
Committee shall determine, in its sole discretion);
4.4.7 to determine whether and under what circumstances an
Option may be bought-out for cash under subsection 10.4;
4.4.8 to determine whether, to what extent and under what
circumstances Stock and other amounts payable with respect to
an award under this Plan shall be deferred either
automatically or at the election of the participant (including
<PAGE>
providing for and determining the amount, if any, of any
deemed earnings on any deferred amount during any deferral
period); and
4.4.9 to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the
Stock covered by such Option shall have declined since the
date the Option was granted.
4.5 Effect of Option Committee's Decision. All decisions,
determinations and interpretations of the Option Committee shall be
final and binding on all Optionees and any other holders of any
Options. Neither the Board, the Committee, nor any member thereof shall
be liable for any act, omission, interpretation, construction or
determination made in connection with the Plan in good faith, and the
members of the Board and of the Committee shall be entitled to
indemnification and reimbursement by the Company in respect of any
claim, loss, damage or expense (including counsel fees) arising
therefrom to the full extent permitted by law.
5. Eligibility.
5.1 Nonqualified Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees.
An Employee or Consultant who has been granted an Option may, if he is
otherwise eligible, be granted an additional Option or Options.
5.2 Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonqualified Stock Option.
However, notwithstanding such designations to the extent that the
aggregate Fair Market Value of the Shares, with respect to which
Options designated as Incentive Stock Options are exercisable for the
first time by any Optionee during any calendar year (under all plans of
the Company or any Parent or Subsidiary), exceeds $100,000, such excess
Options shall be treated as Nonqualified Stock Options. For this
purpose, Incentive Stock Options shall be taken into account in the
order in which they were granted, and the Fair Market Value of the
Shares shall be determined as of the time the Option with respect to
such Shares is granted.
5.3 The Plan shall not confer upon any Optionee any right with respect
to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with his right or the
Company's right to terminate his employment or consulting relationship
at any time, with or without cause, unless otherwise agreed in writing
by the Company and such Optionee.
6. Term of Plan. The Plan shall become effective upon its adoption by the Board
of Directors subject only to approval by the holders of a majority of the
outstanding Shares within 12 months after such date. Should the Plan not be
approved by a vote of shareholders as specified above, the Plan shall terminate
12 months after the effective date, all options issued prior to that termination
date shall continue in effect but without the benefits that would accrue under
the Code or the Act from such shareholder approval. Otherwise, it shall continue
in effect until ten years from the effective date, unless extended by the Board
or sooner terminated under Section 15 of the Plan. No grants of Options will be
made pursuant to the Plan after termination of the Plan.
7. Term of Option. The term of each Option shall be the term stated in the
Option Agreement; provided, however, that in the case of an Incentive Stock
Option, the terms shall be no more than 10 years from the date of grant thereof
<PAGE>
or such shorter term as may be provided in the Option Agreement. However, in the
case of an Option granted to an Optionee who, at the time the Option is granted,
owns Stock representing more than 10% of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement.
8. Option Exercise Price and Consideration.
8.1 The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the
Option Committee; provided, however, that as to an Incentive Option:
8.1.1 granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than
10% of the voting power of all classes of stock of the Company
or any Parent or Subsidiary, the per Share exercise price
shall be no less than 110% of the Fair Market Value per Share
on the date of grant.
8.1.2 granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per
Share on the date of grant.
8.2 The consideration to be paid for the Shares to be issued upon
exercise of an Option may be paid by certified or cashier's check. In
the discretion of the Option Committee as set forth in the Option
Agreement or, except for Incentive Options, determined at the time of
exercise, payment may also be made by any or all of the following:
8.2.1 check,
8.2.2 promissory note,
8.2.3 other shares of the Company's capital stock which a) in
the case of shares of the Company's capital stock acquired
upon exercise of an Option either have been owned by the
Optionee for more than six months on the date of surrender or
were not acquired, directly or indirectly, from the Company,
and (b) have a Fair Market Value on the date of surrender
equal to the aggregate exercise price of the Shares to which
said Option shall be exercised,
8.2.4 authorization for the Company to retain from the total
number of Shares as to which the Option is exercised that
number of Shares having a Fair Market Value on the date of
exercise equal to the exercise price for the total number of
Shares as to which the Option is exercised,
8.2.5 delivery of a properly executed exercise notice together
with irrevocable instructions to a broker to promptly deliver
to the Company the amount of sale or loan proceeds required to
pay the exercise price, or
8.2.6 such other consideration and method of payment for the
issuance of Shares to the extent permitted under applicable
laws.
<PAGE>
9. Limitation on Exercise. The following limitations on exercise of Options
shall apply to all Incentive Options and, except to the extent waived by the
Option Committee and stated in the Option Agreement, to all other Options.
9.1. Termination of Employment. In the event of termination of an
Optionee's relationship as a Consultant (unless such termination is for
purposes of becoming an Employee of the Company) or on termination of
an Optionee's Continuous Status as an Employee with the Company (as the
case may be), such Optionee may, but only within 90 days (or, as to
Options other than Incentive Options, such longer period of time as is
determined by the Option Committee) after the date of such termination,
but in no event later than the expiration date of the term of such
Option as set forth in the Option Agreement, exercise his Option to the
extent that Optionee was entitled to exercise it at the date of such
termination. To the extent that Optionee was not entitled to exercise
the Option at the date of such termination, or if Optionee does not
exercise such Option to the extent so entitled within the time
specified herein, the Option shall terminate.
9.2 Disability of Optionee. Notwithstanding the provisions of Section
9.1 above, in the event of termination of an Optionee's relationship as
a Consultant or Continuous Status as an Employee as a result of his
total and permanent disability (as defined in Section 22(e)(3) of the
Code), Optionee may, but only within 12 months from the date of such
termination and in no event later than the expiration date of the term
of such Option as set forth in the Option Agreement, exercise the
Option to the extent otherwise entitled to exercise it at the date of
such termination. To the extent that Optionee was not entitled to
exercise the Option at the date of termination, or if Optionee does not
exercise such Option to the extent so entitled within the time
specified herein, the Option shall terminate.
9.3 Death of Optionee. In the event of the death of an Optionee, the
Option may be exercised, at any time within 12 months following the
date of death (but in no event later than the expiration date of the
term of such Option as set forth in the Option Agreement), by the
Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent the Optionee
was entitled to exercise the Option at the date of death. To the extent
that the Optionee was not entitled to exercise the Option at the date
of termination, or if the Optionee's estate (or such other person who
acquired the right to exercise the Option) does not exercise such
Option to the extent so entitled within the time specified herein, the
Option shall terminate.
10. Exercise of Option.
10.1 Procedure for Exercise; Rights as a Stockholder. An Option shall
be deemed to be exercised, and the Optionee deemed to be a stockholder
of the Shares being purchased upon exercise, when written notice of
such exercise has been given to the Company in accordance with the
terms of the Option by the person entitled to exercise the Option and
full payment for the Shares with respect to which the Option is
exercised has been received by the Company. Full payment may, as
authorized by the Board, consist of any consideration and method of
payment allowable under Section 8.2 of the Plan. An Option may not be
exercised for a fraction of a Share.
<PAGE>
10.2 Effect on Number of Shares. Exercise of an Option in any manner
shall result in a decrease in the number of shares, which thereafter
may be available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
10.3 Rule 16b-3. Options granted to persons subject to Section 16(b) of
the Exchange Act must comply with the Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to
qualify for the maximum exemption from Section 16 of the Exchange Act
with respect to Plan transactions.
10.4 Buyout Provisions. The Option Committee may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted,
based on such terms and conditions as the Option Committee shall
establish and communicate to the Optionee at the time that such offer
is made.
11. Non-Transferability of Options. The Options may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
12. Stock Withholding to Satisfy Withholding Tax Obligations.
12.1 At the discretion of the Option Committee, Optionees may satisfy
withholding tax obligations as provided in this paragraph. When an
Optionee incurs tax liability in connection with an Option, which tax
liability is subject to tax withholding under applicable tax laws, and
the Optionee is obligated to pay the Company an amount required to be
withheld under applicable tax laws, the Optionee may satisfy the
withholding tax obligation by electing to have the Company withhold
from the Shares to be issued upon exercise of the Option, that number
of Shares having a Fair Market Value equal to the amount required to be
withheld. The Fair Market Value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be
determined (the "Tax Date").
12.2 All elections by an Optionee to have Shares withheld for this
purpose shall be made in writing in a form acceptable to the Option
Committee and shall be subject to the following restrictions:
12.2.1 the election must be made on or prior to the applicable
Tax Date;
12.2.2 once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is
made;
12.2.3 all elections shall be subject to the consent or
disapproval of the Option Committee; and
12.2.4 if the Optionee is subject to Rule 16b-3, the election
must comply with the applicable provisions of Rule 16b-3 and
shall be subject to such additional conditions or restrictions
as may be required thereunder to qualify for the maximum
exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
12.3 In the event the election to have Shares withheld is made by an
Optionee, the Tax Date is deferred under Section 83 of the Code and no
election is filed under Section 83(b) of the Code, the Optionee shall
receive the full number of Shares with respect to which the Option is
<PAGE>
exercised but such Optionee shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.
13. Changes in the Company's Capital Structure. The existence of outstanding
Options shall not affect in any way the right or power of the Company or its
stockholders to make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or its
business, or any merger or consolidation of the Company, or any issue of bond,
debentures, preferred or prior preference stock ahead of or affecting the Stock
or the rights thereof, or the dissolution or liquidation of the Company, or any
sale or transfer of all or any part of its assets or business, or any other
corporate act or proceeding, whether of a similar character or otherwise;
subject to the following:
13.1 If the Company shall effect a subdivision or consolidation of
shares or other capital readjustment, the payment of a stock dividend,
or other increase or reduction of the number of shares of the Stock
outstanding, without receiving compensation therefore in money,
services or property, then (a) the number, class, and per share price
of shares of Stock subject to outstanding Options hereunder shall be
appropriately adjusted in such a manner as to entitle an Optionee to
receive upon exercise of an Option, for the same aggregate cash
consideration, the same total number and class of shares as he would
have received had he exercised his Option; (b) the number and class of
shares of Stock then reserved for issuance under the Plan shall be
adjusted by substituting for the total number and class of shares of
Stock then reserved that number and class of shares of stock that would
have been received by the owner of an equal number of outstanding
shares of each class of Stock as the result of the event requiring the
adjustment.
13.2 Unless otherwise expressly provided in an Option Agreement, upon a
Corporate Change (as defined below), notwithstanding any other term of
this Plan, any and all outstanding Options not fully vested and
exercisable shall vest in full and be immediately exercisable, and any
other restrictions on such Options including, without limitation,
requirements concerning the achievement of specific goals shall
terminate. The foregoing shall apply to Incentive Options, unless
stated to the contrary in the Option Agreement, even though the effect
may be to convert part of the Option to a Nonqualified Option.
13.3 As used in this Plan, a "Corporate Change" shall be deemed to have
occurred upon, and shall mean (a) the acquisition by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of
the Exchange Act) (a "Person"), of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 80% or
more of either (i) the then outstanding shares of Stock of the Company
(the "Outstanding Company Common Stock") or (ii) the combined voting
power of the then outstanding voting securities of the Company entitled
to vote generally in the election of directors (the "Outstanding
Company Voting Securities"); provided, however, that the following
transactions shall not constitute a Corporate Change: (u) any
acquisition by virtue of the conversion of preferred stock of the
Company outstanding on the effective date hereof; (v) customary
transactions with and between underwriters and selling group members
with respect to a bona fide public offering of securities, (w) any
acquisition directly from the Company (excluding an acquisition by
<PAGE>
virtue of the exercise of a conversion privilege), (x) any acquisition
by the Company, (y) any acquisition by any employee benefit plan(s) (or
related trust(s)) sponsored or maintained by the Company or any
corporation controlled by the Company or (z) any acquisition by any
entity pursuant to a reorganization, merger or consolidation, if,
immediately following such reorganization, merger or consolidation the
conditions described in clauses (i), (ii) and (iii) of clause (b) of
this paragraph are satisfied; or (b) the approval by the stockholders
of the Company of a reorganization, merger or consolidation, in each
case, unless immediately following such reorganization, merger or
consolidation (i) more than 60% of, respectively, the then outstanding
shares of common stock (or other equivalent securities) of the entity
resulting from such reorganization, merger or consolidation and the
combined voting power of the then outstanding voting securities of such
entity entitled to vote generally in the election of directors (or
other similar governing body) is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities
who were the beneficial owners, respectively, of the Company Common
Stock and Outstanding Company Voting Securities immediately prior to
such reorganization, merger or consolidation in substantially the same
proportions as their ownership, immediately prior to such
reorganization, merger or consolidation of the Outstanding Company
Common Stock and Outstanding Company Voting Securities, as the case may
be, (ii) no Person (excluding the Company, any employee benefit plan(s)
(or related trust(s)) of the Company and/or its subsidiaries or such
entity resulting from such reorganization, merger or consolidation and
any Person beneficially owning, immediately prior to such
reorganization, merger or consolidation, directly or indirectly, 80% or
more of the Outstanding Company Common Stock or Outstanding Company
Voting Securities, as the case may be) beneficially owns, directly or
indirectly, 80% or more of, respectively, the then outstanding shares
of common stock (or other equivalent securities) of the entity
resulting from such reorganization, merger or consolidation or the
combined voting power of the then outstanding voting securities of such
entity entitled to vote generally in the election of directors (or
other similar governing body) and (iii) at least a majority of the
members of the board of directors (or other similar governing body) of
the entity resulting from such reorganization, merger or consolidation
were members of the Incumbent Board (as defined below) at the time of
the execution of the initial agreement providing for such
reorganization, merger on consolidation. The "Incumbent Board" shall
mean individuals who as of the effective date hereof constitute the
Company's Board of Directors; provided, however, that any individual
becoming a director subsequent to such date whose election, or
nomination for election by the Company's stockholders, was approved by
a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result
of either (i) an actual or threatened election contest (as such terms
are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act), or an actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Company's Board of
Directors or (ii) a plan or agreement to replace a majority of the
members of the Board of Directors then comprising the Incumbent Board.
13.4 The Company intends that this Section shall comply with the
requirements of Rule 16b-3 and any future rules promulgated in
substitution therefore under the Exchange Act during the term of the
Plan. Should any provision of this Section not be necessary to comply
with the requirements of Rule 16b-3 or should any additional provisions
<PAGE>
be necessary for this Section to comply with the requirements of Rule
16b-3, the Board of Directors may amend the Plan to add to or modify
the provisions of the Plan accordingly.
13.5 Except as hereinbefore expressly provided, the issue by the
Company of shares of stock of any class, or securities convertible into
shares of stock of any class, for cash or property, or for labor or
services either upon direct sale or upon the exercise of rights or
warrants to subscribe therefor, or upon conversion of shares or
obligations of the Company convertible into such shares or other
securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number, class, or price of shares of Stock
then subject to outstanding Options.
14. Time of Granting Options. The date of grant of an Option shall, or all
purposes, be the date on which the Option Committee makes the determination
granting such Option, or such other date as is determined by the Option
Committee. Notice of the determination shall be given to each Employee or
Consultant to whom an Option is so granted within a reasonable time after the
date of such grant.
15. Amendment and Termination of the Plan.
15.1 Amendment and Termination. The Board may at any time amend, alter,
suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made which would impair the
rights of any Optionee under any grant theretofore made, without his or
her consent. In addition, to the extent necessary and desirable to
comply with Rule 16b-3 under the Exchange Act or with Section 422 of
the Code (or any other applicable law or regulation, including the
applicable requirements of the NASD or an established stock exchange),
the Company shall obtain stockholder approval of any Plan amendment in
such a manner and to such a degree as required.
15.2 Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and
such Options shall remain in full force and effect as if this Plan had
not been amended or terminated, unless mutually agreed otherwise
between the Optionee and the Board, which agreement must be in writing
and signed by the Optionee and the Company.
16. Conditions Upon Issuance of Shares.
16.1 Shares shall not be issued pursuant to the exercise of an Option
unless the exercise of such Option and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions
of law, including without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the
Shares may then be listed, and shall be further subject to the approval
of counsel for the Company with respect to such compliance.
16.2 As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at
the time of any such exercise that the Shares are being purchased only
for investment and without any present intention to sell or distribute
<PAGE>
such Shares if, in the opinion of counsel for the Company, such a
representation is required by any of the aforementioned relevant
provisions of law.
17. Reservation of Shares. The Company, during the term of this Plan, will at
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. Information to Optionees. The Company shall provide to each Optionee, during
the period for which such Optionee has one or more Options outstanding, copies
of all annual reports and other information, which are generally provided to all
stockholders of the Company. The Company shall not be required to provide such
information to persons whose duties in connection with the Company assures their
access to equivalent information.
19. Governing Law; Construction. All rights and obligations under the Plan shall
be governed by, and the Plan shall be construed in accordance with, the laws of
the State of Oklahoma without regard to the principals of conflicts of laws.
Titles and headings to Sections herein are for purposes of reference only, and
shall in no way limit, define or otherwise affect the meaning or interpretation
of any provisions of the Plan.
ADOPTED by the Directors on November 16, 1998.
APPROVED by the Shareholders on January 5, 1999.
AMENDED by the Shareholders on February 24, 2000.
